Template:Failure to pay procedure: Difference between revisions

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::(ii) a notice by the Non-Defaulting Party to the Defaulting Party that the failure has happened.
::(ii) a notice by the Non-Defaulting Party to the Defaulting Party that the failure has happened.
*'''Notice of failure''': The {{{{{1}}}|Non-defaulting Party}} must give notice of the {{{{{1}}}|Failure to Pay or Deliver}} (which since it is not due until the close of business on a given day, [[Q.E.D.]], can be validly given ''only after'' [[close of business]] on the due date for payment or delivery and, by dint of Section {{{{{1}}}|12(a)}} ({{{{{1}}}|Notices}}), the notice will only be deemed effective on the following Local Business Day: ie  '''T+1'''. <ref>'''Spod’s note''': This notice requirement is key from a {{{{{1}}}|Cross Default}} perspective (if you have been indelicate enough to widen the scope of your [[cross default]] to include [[derivatives]], that is): if you don’t have it, ''any'' failure to pay under your {{isdama}}, however innocuous — even an operational oversight — automatically counts as an {{{{{1}}}|Event of Default}}, and gives a different person to the right to close ''their'' {{isdama}} with your {{{{{1}}}|Defaulting Party}} because of it defaulted to ''you'', even though (a) the {{{{{1}}}|Defaulting Party}} hasn’t defaulted to ''them'', and (b) you have decided not to take any action against the {{{{{1}}}|Defaulting Party}} yourself.</ref>
*'''Notice of failure''': The {{{{{1}}}|Non-defaulting Party}} must give notice of the {{{{{1}}}|Failure to Pay or Deliver}} (which since it is not due until the close of business on a given day, [[Q.E.D.]], can be validly given ''only after'' [[close of business]] on the due date for payment or delivery and, by dint of Section {{{{{1}}}|12(a)}} ({{{{{1}}}|Notices}}), the notice will only be deemed effective on the following Local Business Day: ie  '''T+1'''. <ref>'''Spod’s note''': This notice requirement is key from a {{{{{1}}}|Cross Default}} perspective (if you have been indelicate enough to widen the scope of your [[cross default]] to include [[derivatives]], that is): if you don’t have it, ''any'' failure to pay under your {{isdama}}, however innocuous — even an operational oversight — automatically counts as an {{{{{1}}}|Event of Default}}, and gives a different person to the right to close ''their'' {{isdama}} with your {{{{{1}}}|Defaulting Party}} because of it defaulted to ''you'', even though (a) the {{{{{1}}}|Defaulting Party}} hasn’t defaulted to ''them'', and (b) you have decided not to take any action against the {{{{{1}}}|Defaulting Party}} yourself.</ref>
*'''[[Grace Period]]''': Once the notice is effective, the {{{{{1}}}|Defaulting Party}} has a window (the grace period) in which it can remedy the failure to pay or deliver. the standard grace periods are set out in Section {{{{{1}}}|5(a)(i)}}. Be careful here: under a {{2002ma}} the standard is '''''one''''' {{isdaprov|Local Business Day}}. Under the {{1992ma}} the standard is '''''three''''' {{isda92prov|Local Business Day}}s. ''But check the {{{{{1}}}|Schedule}}'' because in either case this is the sort of thing that counterparties adjust: {{2002ma}}s are often adjusted to conform to the {{1992ma}} standard of three {{{{{1}}}|LBD}}s, for example. To be clear, once you have a clear, notified Failure to Pay or Deliver, you have to wait ''at least'' one and possibly three or more {{isdaprov|Local Business Day}}s before doing anything. Therefore you are on tenterhooks until the [[close of business]] '''T+2''' {{isdaprov|LBD}}s (standard {{2002ma}}), or '''T+4''' {{isda92prov|LBD}}s (standard {{1992ma}}).
*'''[[Grace Period]]''': Once the notice is effective, the {{{{{1}}}|Defaulting Party}} has a window (the grace period) in which it can remedy the failure to pay or deliver. the standard grace periods are set out in Section {{{{{1}}}|5(a)(i)}}. Be careful here: under a {{2002ma}} the standard is '''''one''''' {{isdaprov|Local Business Day}}. Under the {{1992ma}} the standard is '''''three''''' {{isda92prov|Local Business Day}}s. ''But check the {{{{{1}}}|Schedule}}'' because in either case this is the sort of thing that counterparties adjust: {{2002ma}}s are often adjusted to conform to the {{1992ma}} standard of three {{{{{1}}}|LBD}}s, for example. To be clear, once you have a clear, notified {{isdaprov|Failure to Pay or Deliver}}, you have to wait ''at least'' one and possibly three or more {{isdaprov|Local Business Day}}s before doing anything. Therefore you are on tenterhooks until the [[close of business]] '''T+2''' {{isdaprov|LBD}}s (standard {{2002ma}}), or '''T+4''' {{isda92prov|LBD}}s (standard {{1992ma}}). At the expiry of this [[grace period]], you finally have a fully operational {{{{{1}}}|Event of Default}}. This gives you the right, by not more than 20 days’ notice<ref>See discussion on at Section {{{{{1}}}|6(a)}}.</ref> to designate an {{isdaprov|Early Termination Date}} for all outstanding {{isdaprov|Transaction}}s. So, at some point in the next twenty days. For this we go to Section {{{{{1}}}|6(e)}}., noting as we fly over it, that Section {{{{{1}}}|6(c)}} says the game is still up, even if the Event of Default which triggers it ceases to exist in the meantime.
*'''Section {{{{{1}}}|6(e)}} notice''': TheSection {{{{{1}}}|6(e)}} notice terminating the Transactions may only be served after close of business at the expiry of the [[grace period]], so therefore the first day on which a termination notice following a failure to pay {{{{{1}}}|Event of Default}} can be effective under an {{isdama}} is T+3 ({{2002isda}}) or T+5 {{1992isda}}.
*'''Section {{{{{1}}}|6(e)}} notice''': The Section {{{{{1}}}|6(e)}} notice terminating all outstanding {{{{{1}}}|Transaction}}s may only be served after close of business at the expiry of the [[grace period]], so therefore the first day on which a termination notice following a failure to pay {{{{{1}}}|Event of Default}} can be effective under an {{isdama}} is T+3 ({{2002isda}}) or T+5 {{1992isda}}.

Revision as of 11:58, 13 March 2020

{{{{{1}}}|Failure to pay}} procedure

Terminating the ISDA Master Agreement on this ground requires:

  • Failure: A {{{{{1}}}|Failure to Pay or Deliver}}, on day T. This is an {{{{{1}}}|Event of Default}} under Section {{{{{1}}}|5(a)(i)}}. You must have:
(i) a Failure by the Defaulting Party to make a payment or delivery when due
(ii) a notice by the Non-Defaulting Party to the Defaulting Party that the failure has happened.
  • Notice of failure: The {{{{{1}}}|Non-defaulting Party}} must give notice of the {{{{{1}}}|Failure to Pay or Deliver}} (which since it is not due until the close of business on a given day, Q.E.D., can be validly given only after close of business on the due date for payment or delivery and, by dint of Section {{{{{1}}}|12(a)}} ({{{{{1}}}|Notices}}), the notice will only be deemed effective on the following Local Business Day: ie T+1. [1]
  • Grace Period: Once the notice is effective, the {{{{{1}}}|Defaulting Party}} has a window (the grace period) in which it can remedy the failure to pay or deliver. the standard grace periods are set out in Section {{{{{1}}}|5(a)(i)}}. Be careful here: under a 2002 ISDA the standard is one Local Business Day. Under the 1992 ISDA the standard is three Local Business Days. But check the {{{{{1}}}|Schedule}} because in either case this is the sort of thing that counterparties adjust: 2002 ISDAs are often adjusted to conform to the 1992 ISDA standard of three {{{{{1}}}|LBD}}s, for example. To be clear, once you have a clear, notified Failure to Pay or Deliver, you have to wait at least one and possibly three or more Local Business Days before doing anything. Therefore you are on tenterhooks until the close of business T+2 LBDs (standard 2002 ISDA), or T+4 LBDs (standard 1992 ISDA). At the expiry of this grace period, you finally have a fully operational {{{{{1}}}|Event of Default}}. This gives you the right, by not more than 20 days’ notice[2] to designate an Early Termination Date for all outstanding Transactions. So, at some point in the next twenty days. For this we go to Section {{{{{1}}}|6(e)}}., noting as we fly over it, that Section {{{{{1}}}|6(c)}} says the game is still up, even if the Event of Default which triggers it ceases to exist in the meantime.
  • Section {{{{{1}}}|6(e)}} notice: The Section {{{{{1}}}|6(e)}} notice terminating all outstanding {{{{{1}}}|Transaction}}s may only be served after close of business at the expiry of the grace period, so therefore the first day on which a termination notice following a failure to pay {{{{{1}}}|Event of Default}} can be effective under an ISDA Master Agreement is T+3 (2002 ISDA) or T+5 1992 ISDA.
  1. ↑ Spod’s note: This notice requirement is key from a {{{{{1}}}|Cross Default}} perspective (if you have been indelicate enough to widen the scope of your cross default to include derivatives, that is): if you don’t have it, any failure to pay under your ISDA Master Agreement, however innocuous — even an operational oversight — automatically counts as an {{{{{1}}}|Event of Default}}, and gives a different person to the right to close their ISDA Master Agreement with your {{{{{1}}}|Defaulting Party}} because of it defaulted to you, even though (a) the {{{{{1}}}|Defaulting Party}} hasn’t defaulted to them, and (b) you have decided not to take any action against the {{{{{1}}}|Defaulting Party}} yourself.
  2. ↑ See discussion on at Section {{{{{1}}}|6(a)}}.
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